HOUSTON (CN) – After inflating the stock price with a deceptive press release, directors of Carbo Ceramics – a fracking company – made millions dumping their shares before announcing that sales had dropped by 70 percent in a key market, a shareholder claims in a derivative complaint.
Named plaintiff Josephine Morrow sued eight Carbo Ceramics directors in Harris County Court on behalf of the Houston-based company’s shareholders.
Carbo supplies products and services for hydraulic fracturing, or fracking, of oil-and-gas wells.
“The company describes itself as ‘the world’s largest supplier of ceramic proppant, the provider of the world’s most popular fracture simulation software, and a provider of fracture design and consulting services,'” according to the complaint. “The term ‘proppant’ is used to describe small particles that prop open the fractures in rock formations that are generated by hydraulic fracking.
“On October 27, 2011, Carbo Ceramics issued a press release announcing financial results for the third quarter of 2011.
“In that release and in a conference call that followed, certain defendants made statements that they, and all of the individual defendants, knew were misleading to investors.”
Through the press release, CEO Gary Kolstad “personally assured investors that there was ‘positive momentum’ in sales going into the fourth quarter, and further stated that ‘we expect proppant sales volumes to remain healthy … we remain optimistic with respect to proppant demand in 2012,” according to the complaint.
These statements were outright lies, Morrow says, as Carbo Ceramics’ directors knew the market was shifting away from the natural gas-rich Haynesville Shale formation in southwestern Arkansas, northwest Louisiana and East Texas, to “liquids-rich,” or oil rich, plays in “geographic areas where the company did not yet have adequate distribution networks.”
“Instead of disclosing to investors that the already-in-progress geographic market shift was a critical problem for the company, the October press release and conference call made it sound like this was instead a development that would increase the company’s market share and profits,” the complaint states.
“Carbo Ceramics’ stock surged more than $20 per share to $144.18 in response to the optimistic and misleading statements.
“On January 26, 2012, however, the truth came out. Carbo Ceramics issues a press release announcing that the company had witnessed a 70 percent decline in proppant sales in the Haynesville formation, a formerly leading market region for company products, and that it had been unable to fully compensate for the loss in other regions due to the logistical problems.
“In response to the company’s announcement the price of Carbo Ceramics’ common stock plummeted nearly $27 per share, from $130.72 to $103.76.”
Before the truth emerged, Morrow claims, some directors took advantage of their inside information to sell their shares at inflated prices.
“Defendant Morris, Chairman of Carbo Ceramics’ Board of Directors (‘Board’) sold over $75 million dollars of Carbo Ceramics stock during this period at prices as high as $155.68 per share,” the complaint states. “Defendant Robert S. Rubin (‘Rubin’) sold some $15.795 million of his stock at prices as high as $160.40 per share.
“These sales were not routine or customary.
“Other of the individual defendants sold various smaller amounts of Carbo Ceramics stock in the months before the bad news was publicly announced.
“During the relevant period defendants recorded twenty-seven (27) separate sales or dispositions of stock but, other than exercising options to acquire stock at zero cost, only one purchase.
“During this period these defendants sold over 600,000 shares of Carbo Ceramics stock while purchasing just one thousand shares.”
Due to the insider trading, Morrow says, the company “is now the subject of several securities fraud class actions,” and will have to shell out significant cash defending against, and paying any settlements or judgments from, the litigation.
“For at least the foreseeable future, Carbo Ceramics will suffer from what is known as the ‘liar’s discount,’ a term applied to the stocks of companies who have been implicated in improper behavior and have misled the investing public, such that Carbo Ceramics’ ability to raise equity capital or debt on favorable terms in the future is now impaired,” according to the complaint.
Morrow seeks damages for breach of fiduciary duty, waste of corporate assets, unjust enrichment, aiding and abetting fiduciary violations.
She also seeks damages from Rubin and Morris for insider trading.
She also wants the defendants to pay restitution to the company, and for the company to implement a rule permitting shareholders “to nominate at least three additional candidates for election to the Board.”
Morrow is represented by Paul Warner of Cypress, Texas and Frank Johnson of San Diego, Calif.